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By FinanceBuddy Staff Writer
Banks and mortgage companies are always advertising their interest rates. Government regulators alter the prime interest rate in order to balance the economy. The current interest rates rise and fall as the prime interest rate is raised and lowered. But as a borrower, it is not the current prime interest rate that matters, but only the interest rate that you will have to pay. The prime interest rate is the baseline for which current lending rates are determined. Lenders and banks do not offer this rate to their customers, however. Instead they offer loans with so many points above the prime rate. The amount of points above prime which lenders charge as interest varies greatly from borrower to borrower. The interest rate is a reflection of the risk that the lender is assuming when making a loan to a particular borrower. The risk to the lender increases as odds that the borrower will not repay the loan as required become greater. An increase of risk for the lender means an increase in interest rates for the borrower. There are many factors which influence the interest rate you will be charged. The focus of these factors is to determine the amount of risk the lender is assuming when lending you money. The chance that you will default on the loan determines the rate you will be charged. The criteria which the lender uses to calculate these odds are many, but they deal mainly with your history of paying your financial responsibilities in the past and your ability of paying them in the future. The lender determines your odds of defaulting on the loan based on this payment pattern, as well as on your current income. If you have a good pattern of paying your previous loans and you can illustrate that you have the means to meet the payments of the new loan, then you will be lower risk to the lender. However, if you have a poor payment pattern in the past and if the lender doubts your ability to meet the financial needs of the loan, then the lender is assuming a great risk in lending you the money and thus will charge you a much higher interest rate. Thus, when asked what the current mortgage rate is, you are really asking what the current rate for yourself is. This is another way of asking what your risk to a lender is, based on your past payment pattern and current income. In fact, this risk is not determined by the lender, but is actually determined by you.